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Auction-Rate Securities: Can Investors Recover?

In response to the collapse of the auction-rate securities market, many investors are left questioning what to do next about their illiquid holdings. Investors should realize that there is not one correct solution that all auction-rate securities investors should follow. Whether investors decide to sell their securities or wait for the market to improve, here are some key points that investors should take into account when making their decision: 

Trends in the Market 

Some of the top brokerage firms agree that the auction-rate securities market has little hope of recovering, but some investors have had their securities refinanced. According to a June 6th Bloomberg article, municipal issuers either made plans to refinance or refinanced about $76.1 billion of auction-rate securities. In addition to municipal auction-rate securities, some investors have also been redeemed for their auction-rate preferred stocks. Although additional refinancings are expected to occur, investors should be aware that not all stock issuers are willing to refinance auction rate securities. Some issuers have decided to not refinance while others have only refinanced portions of their investors’ losses.  

Student loan auction-rate securities, which constitute $85 billion of the market, are among the most illiquid and unlikely to be refinanced. According to a July 10th Bloomberg report, less than 4% of student loan auction-rate securities have been refinanced so far. This is because issuers are not charged high penalty interest rates when auctions fail, leaving them little incentive to refinance. Auction-rate securities issued by CDOs, or Collateralized Debt Obligations, are also highly illiquid.   

Weighing Options 

When investors face the decision of what to do next with their auction-rate securities, factors such as liquidity and future expectations should be taken into consideration. For example, investors who do not want to risk their securities in the market any longer and need liquidity in the near future may choose to sell rather than wait. Or, investors who do not need liquidity any time soon and their issuer is being charged penalty interest rates should consider waiting rather than selling. Investors should learn what their issuers’ future plans are for refinancing. In addition, other resale markets are available where investors can dispose of their illiquid auction-rate securities. There is no guarantee, however, that this market will be successful in the future. So far, only one private market has had successful dispositions of illiquid auction-rate securities: Restricted Securities Trading Network (to learn more, visit  

Finally, investors should decide whether or not they are going to take legal action against their issuer to recover their losses. If so, then it is in the best interest of investors to take action as soon as possible rather than waiting to file a claim so they do not risk reducing the amount of damages they can recover.   

To Sell or Not to Sell? 

Investors could see many advantages to selling their auction-rate securities. First and foremost, investors receive liquid cash from selling and avoid the stress of worrying about future harm to their investments that could occur in the unpredictable market. Also, investors are able to better pursue legal action because they have made an effort to reduce their damages upon discovery of their investment losses.  

Investors can benefit from waiting because they could potentially be refinanced from their issuer. If an investor is refinanced, he or she no longer has to worry about lawsuits or illiquidity. Also, selling one’s auction-rate securities immediately will usually not earn an investor the face value of their investments. Waiting to sell avoids this discount problem. 

One thought on “Auction-Rate Securities: Can Investors Recover?”

  1. sandrar Says:

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